Earlier this year, the U.S. Department of Labor issued final regulations under ERISA Section 408(b)(2) that require "covered service providers" to ERISA plans to disclose the fees (direct and indirect) that they may receive in connection with the services provided to the plan. While the majority of an ERISA plan's service providers are record-keepers, actuaries, and the like, it will be possible for the new disclosure rules to apply to private investment funds or investment managers. If applicable, the disclosures must be provided by July 1, 2012. Failure to comply with these new regulations can result in substantial penalties imposed on the fund, put valuable ERISA fund investors in a difficult position, and jeopardize those client relationships. Furthermore, ERISA plans are required to report noncompliance with the disclosure rules to the Department of Labor.
Under the new rules, contracts or arrangements with an ERISA plan will not be compliant if the service provider (typically an investment manager or a fund GP) does not provide detailed written disclosures to the ERISA plan in advance of entering into the contract. The new rules apply to both existing contracts as well as new contracts entered into after July 1, 2012. There also are annual updating requirements. If you have not done so already, it is important to take the time to review your dealings with ERISA plan investors. While the language of the regulation can cover a wide array of contractual agreements with plans, some of the more common arrangements that are subject to the rules include managed accounts or entities that have agreed to serve as a registered investment adviser.
Not all arrangements with ERISA plan investors will require disclosure under the new regulations. However, despite the fact that the new regulations impose the disclosure regulation directly on service providers rather than the plan itself (separate disclosure rules have been issued that will apply to the plans), some ERISA plans have taken the step of contacting all of the parties with whom they do business to request that detailed fee information be disclosed. In some cases, they have cast a very wide net — frequently picking up service providers that are not subject to the disclosure rules. Given the ERISA plan's obligation to report noncompliant service providers, even fund managers that are not subject to the disclosure rules will need to carefully coordinate with their ERISA fund clients.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Arturo Requenez II
New York, New York
Galen R. Mason